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ECONOMISTS FEAR RISING INTEREST RATES COULD TILT THE NATION INTO A RECESSION

Unprecedented levels of debt could overwhelm some businesses and families and deepen an economic downturn if rising interest rates eventually trigger a recession, some experts warn.

Though the non-farm economy grew at a robust 3 percent annual rate in the first quarter of 1989, many economists believe Federal Reserve efforts to slow inflation by raising interest rates may inadvertently tilt the country into recession by early 1990.Many analysts anticipate a milder recession than the 1981-82 barn-burner that shot unemployment to 10.7 percent, pushed interest rates into the high teens and shrank economic output by 3.5 percent. Others, however, fear high debt levels could yield unexpected misery.

Since 1980, the outstanding debt of U.S. non-financial corporations has more than doubled, from $828 billion to nearly $1.9 trillion at the end of last year.

"It is a spectacular rate of growth, and the debt level itself doesn't really do justice to the story," warned a Federal Reserve debt analyst who asked not to be identified. "If you start looking at debt-to-equity, debt-servicing levels and debt-to-net worth, it begins to get scary."

The ratio of corporate debt to net worth has risen from 30 percent in 1980 to nearly 51 percent last year. Overall, there has been a "sharp decline in U.S. industrial credit quality," according to Standard and Poors, a bond rating company.

And those figures are averages. "The picture is worse than that," said Paul Getman, an economist with WEFA Group, a consulting firm in Bala Cynwyd, Pa. Many corporations, such as IBM or 3M Corp., have low debt-to-asset ratios. Other businesses "on the tail of the equity distribution might have three or four times as much debt to equity," Getman says.

If highly leveraged consumers retrench in a recession, the risk is heavily indebted corporations could suffer a cash-flow squeeze and default on their debt.

A study by Brookings Institution, a Washington think tank, warned last year that under some circumstances, fully 10 percent of these debt-laden public corporations would fail in a deep recession.

Fueling such concerns is the increased use of "junk bonds" - high-yield corporate bonds mainly associated with the wave of mergers, takeovers and restructurings that has swept the economy in the 1980s.

High-risk junk bonds now represent nearly 22 percent of all outstanding corporate debt, soaring from $18.5 billion in 1980 to about $185 billion at the end of last year, said a Congressional Research Service study released by Senate Finance Committee Chairman Lloyd Bentsen, D-Texas.

"When we have another recession - and ultimately we will - you're going to see that recession deeper and longer because of this great increase in debt and some of these highly leveraged corporations," Bentsen warned.

Bentsen favors changing the tax code to "see if we can't cool off the attractiveness of debt and try to encourage more equity."

Consumers "are collectively more leveraged now than ever before," said Bruce Steinberg, an economist with Merrill Lynch in New York. "And more of that leverage consists of floating-rate debt that costs more to service as interest rates rise."

For individuals, the ratio of outstanding installment credit to income has climbed from just over 12 percent in 1980 to nearly 16 percent in February. Consumer installment credit outstanding has soared from $298 billion to $692.7 billion.

Add in mortgages and other forms of debt and consumers are holding about $2.8 trillion of liabilities.